Migration of Global Supply Chains: A Real Effect of Mandatory ESG Disclosure

This study examines changes in firms’ global supply chain composition following the staggered introduction of mandatory ESG disclosure in different countries. We find that the introduction of mandatory ESG disclosure is associated with the selection of a greater number of new suppliers from countries with weaker ESG-related regulatory enforcement and a more opaque ESG-related corporate information environment. These findings suggest that mandating ESG disclosure creates firm incentives to evade and/or hide ESG obligations by transferring ESG risks to supplier firms. The extent by which firms engage in such strategies is influenced by their financial constraints and the role of financial intermediaries such as analysts and institutional investors. Further results show that the strategies resulted in improving firms’ ESG profile which cannot be explained by increased operating costs. Collectively, our findings suggest that mandatory ESG disclosure policies can have longer-lasting real effects in changing firms’ global outsourcing practices.